Muhammad Yunus, a native of Bangladesh, believed in the credit-worthiness of persons in poverty. Beginning in the 1970s, he began making loans to poor people in very small amounts of money – thus the practice of microfinancing was formed. After six million people were helped and $27 billion loaned, Yunus received the Nobel Peace Prize this past year for his efforts.
Hope Community Steps In
Credit unions were created for this very purpose, to be the lender to those who were not otherwise being helped. After Hurricane Katrina hit New Orleans, Hope Community (Jackson, MS, $53.7M) used microfinancing to help revitalize the community.
Who were these loans right for? With many small businesses traumatized by the hurricane, owners were left trying to rebound but generally without jobs or capital. The vast majority of these business owners are not a good fit for traditional commercial loan products. But Hope saw an opportunity. It joined forces with a company called Accion, which specializes in microfinancing. Hope does the marketing and outreach for the loan program. Once a loan application is received, Accion steps in and closes the loan. At this point the loan is sold back to Hope and the customer becomes a member of Hope, which administers all services related to the loan. Since Katrina, Hope has administered 46 loans totaling $518,500. The average median loan amount is $8,100.
Ensuring High Loan Quality
Some wonder if the risk involved with these loans is worth the effort. But both Hope and Accion know the risks and have had significant experience in lending. “The viability is certainly considered before the papers are drawn,” says CEO/President William Bynum. Owing to its rigorous screening process, Hope has only had one delinquent loan — underwriting is still a very important process despite the low value of these loans.
Accion looks at much more than an applicant’s credit score, which many of the individuals applying may not even have. “Our underwriting is based on the following: character references (interviewing acquaintances, landlords, customers, and suppliers), cash flows/bank statements, and site visits,” explains Maelle Fonteneau, a loan officer with Accion. With these, Accion hopes to paint a more complete picture of the individual than is generally done, a picture a credit score many not represent. The involved process takes no more than 8-10 business days.
Spreading the Word
Getting the word out about this program is key. Many of those who need the loan are not financially savvy enough to know of microfinancing’s existence. Thus partnering with various community organizations became a critical way for Hope to reach those in need of assistance. They have made a point of having their employees reach out to the community. “We are certainly visible – people see us in community-sponsored events as well as performing service on boards and the like,” adds Bynum. Radio was also a key avenue Hope used aggressively, because its target demographic is composed of persons more likely to own a radio.
Once individuals were aware of the program, what types of businesses were coming in for microfinancing? The vast majority were service-based businesses. Some examples are restaurants, lawn care services, construction worker pools, and day care centers. The loans, which have a maximum of $25,000 and are normally between $12,000 to 15,000, are generally short-term, amortizing loans that are combined with technical assistance from Hope. Technical assistance refers to the credit union providing an “industry specialist” who helps the borrower maximize the use of the loan and get the business running again.
With this program, Hope Community CU can have tremendous impact on many individuals, helping them pick up the pieces of their lives after a devastating natural disaster. Because of the credit union, Hope now exists where it did not immediately after the storm.
Revisiting New Orleans Credit Unions
In the September 2005 issue of Callahan’s Credit Union Report, we studied the credit unions affected by Hurricane Katrina in late August of 2005. In this issue of CUSP, we present a case study of Hope Community Credit Union which is providing microfinance loans to victims of Katrina. The graph above, and facts to the right, provides a complementary view of the case study, offering statistics on the region’s economy and the state of credit unions in Orleans Parish. Amy Liu and Allison Plyer from the Brookings Institution state in The New Orleans Index, “Two years after Katrina, the New Orleans regional economy is strong but has plateaued somewhat in the past year”. The credit union data substantiates this claim, studying the extraordinary growth in assets and shares in 2006, and tempered growth in 2007.